Banks do not Lend Deposits as Loans
I stumbled on the video Prize lecture: Ben Bernanke, economic sciences prize 2022 and was confused about what Mr. Bernanke says about lending markets.
First, in minute two of the video, he talks about the simple economics of lending. There is imperfect and asymmetric information. That usually means the borrower knows more about his creditworthiness than any lender. He points out that "banks specialize in overcoming these imperfections."
So far, it's all good. I agree that banks are better at overcoming these imperfections as they have more information about a potential coworker.
However, in minute 4:33, he points out the following:
But Banks themselves are also borrowers. They have to get the funds they need to lend to ultimate borrowers.
I was quite shocked to hear such a statement from an established economist. Even more so, an economist researches the role of banks, especially in financial crises. And who just won the Nobel Prize in Economics on this topic (to be precise: The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel).
I seem to remember, somewhere deep in my mind, the process of creating money by expanding the balance sheet [1,2]. A credit between a commercial bank and a customer leads to a balance sheet extension for both. It creates new credit by adding a loan as an asset to its balance sheet and simultaneously creating a liability. The liability appears as a deposit in the borrower's checkings account. At no point does money flow from a depositor to a creditor. There's not an immediate technical limitation, but banks must maintain certain levels of capital to cover potential losses. It means they can't lend out an unlimited amount of money.
In contrast, if non-banks lend money, there is no extension of the balance sheet but an assets swap. For example, I lend all my cash to my friend; this cash on my balance sheet gets swapped for a receivable from a loan.
It is a sophisticated system because there's a separation of concerns. Commercial banks concentrate on the private loan business. A commercial bank knows its customers and the local economy well. So they can competently decide if a loan makes sense. It wouldn't work that efficiently if people in the central bank had to decide whether a family in a distant village gets a mortgage to build a house. The people working in a central bank, which might be in a distant major city, lack insight into local matters. However, they might employ experts in statistics and economics who monitor the economy. So, the central bank can influence the overall economy by adjusting interest rates and other monetary tools.
I find it puzzling that Mr. Bernanke does not address the process of money creation. I can't quite understand why he omits this topic, as to me, understanding the inner workings of banks seems essential for grasping the complexities of financial crises.
[1]: Money creation in the modern economy.
[2]: Can banks individually create money out of nothing? — The theories and the empirical evidence